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Tuesday, July 15, 2003
Robertson Morrow (jeez, what a GREAT name) has an cover article in the American Conservative about the decline of the dollar that just demands a thorough fisking, so here goes.

Morrow starts out with an anecdote from the Hitchhiker's Guide to the Galaxy, the basic point of which is that 79% of the people are useless. The only worthwhile people are "the best and brightest... scientific researchers and key executives", and "those who do the actual work, such as manufacturing". The rest, "Hairdressers, tired TV producers, insurance salesmen, personnel officers, security guards, public relations executives, management consultants, you name it," are "useless ballast".

Now in the Hitchhiker's Guide to the Galaxy, this is told in a rather humorous way and thus it's not quite as hate-filled as I've managed to portray it. But Mr Morrow apparently feels that Douglas Adams was right. Interestingly, Mr Morrow himself is described as a financial analyst, which would surely qualify as "useless ballast" under this schema.

The article is filled with questionable conclusions and assertions.

"But foreigners have had their fill of lending us dollars."

Oh, really? Then why are interest rates at or near historic lows in this country? Funny, the traditional supply and demand model would indicate that if the supply of lenders dried up, the price (interest rates) would rise.

"In the six worst years of the ’80s trade crisis, 1984 to 1989, the cumulative current account deficits totaled 16 percent of GDP. At that time, the dollar declined by half."

This is ridiculous. The dollar did not decline by anywhere near half from 1984 to 1989. It declined about 20% against the British pound, and about 30% against the French franc, and these declines were from historic highs for the greenback. In 1984, the French franc had hit 8 to the dollar, which a French newspaper summarized with the simple headline Huit! (Eight!). By grabbing a year when the dollar happened to be high and comparing it to a year when it was low, you can prove anything. The current account deficits have continued to rise, but the dollar is now worth a little over 10% more than it was against the pound. We did decline about 50% against the Japanese yen, from 1984-1989, but you would have a hard time proving ill effects from that on the American side (it does seem to have hurt Japan quite a bit). The current account deficit with Japan has not changed much and yet our currency is roughly where it was in 1989 against the yen.

His explanation for the dollar's value is entirely based on trade. But there are lots of other factors, as should be obvious from the fact that the US dollar has appreciated against the yen since 1993, while our trade deficit with Japan has remained high. In fact, most currency traders blame the dollar's woes on the low rates prevailing in the US, which causes investors seeking higher returns to send their money to alternative markets. Indeed if you look at the low point of the dollar against the yen in 1993, it coincided with another period of very low short-term interest rates in the US.


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